What is a commodity?

A commodity is a basic raw material that is essentially interchangeable with another unit of the same kind, regardless of who produced it. A bushel of No. 2 yellow corn is treated the same whether it was grown in Iowa or in Mato Grosso. That interchangeability — the technical word is fungibility — is what lets commodities trade on standardized contracts at a single market price.

Hard vs soft commodities

The market splits raw materials into two broad families:

• Hard commodities are mined or extracted: crude oil, natural gas, gold, silver, copper, iron ore.
• Soft commodities are grown or raised: soybeans, corn, coffee, sugar, cotton, live cattle.

Brazil is a giant in both camps — a leading exporter of soybeans, coffee, sugar and beef (soft) and of iron ore and crude oil (hard).

Why commodities are their own asset class

Unlike a stock, a commodity pays no dividend and has no earnings. Its value comes purely from supply and demand for a physical thing people need. That makes commodities behave differently from equities and bonds — they often rise when inflation rises, which is why investors use them for diversification and as an inflation hedge.

The rest of this track shows you how these markets are organized, what the major groups are, and how you can actually take a position.